dangers of MCA loans

The Dangers of Merchant Cash Advances: Part 3

Posted September 23rd, 2022

Merchant cash advances, or MCAs, are loans that business owners usually look to in a crisis. Think of them as the equivalent to the business version of a paycheck advance loan with high interest and repayment terms that often do not align with what is best for the business. MCA’s are dangerous for most merchants but horrible for construction businesses, and we’ll explain why in this four-part blog series.

In the third part of our series, we will illustrate the who’s behind the what. Be on the lookout for loan sharks dressed in brokers’ clothes. As we touched on briefly in Part 2, we will learn more about the broker world and their role in MCA loans.

Who Are Merchant Cash Advance Lenders?

A quick online search will show hundreds, if not thousands, of different websites advertising MCA loans. There are only about a dozen, or fewer, actual lenders. Merchant Cash Advance lenders selling these loans are typically brokers or independent agents with affiliations or relationships with these merchant cash advance lenders. Not all brokers are bad. We work with many brokers or referral sources that may work with clients to find the right solution. 

However, a lot of brokers are just selling merchant cash advance loans. These brokers are people that businesses need to be cautious of because a merchant cash advance loan isn’t for everyone. Like our company, Mobilization Funding is not for everyone. We educate ourselves on different lending programs and options like merchant cash advance loans, factoring companies, and purchase order financing because we want to ensure we send people to the right source. We want what’s best for borrowers, even if we’re not a fit for them. 

About Broker Networks

The broker network is directly responsible for the ultimate cost of the loan or, at a minimum, can significantly influence it. For example, the actual MCA lender will give the broker the actual cost of the loan and then provide them the ability to increase it within a range to increase their commission. The broker then has the option, or the ability, to markup that loan cost to the borrower. That markup can range from 2% to as much as 10% or more. This additional markup is how brokers make money on the loan transaction. The MCA lenders have set it up so the broker can make a lot of commission, and that commission drives behavior.

Some brokers might present themselves as the actual lender with their logo on application forms or how they introduce their product. Still, most MCA brokers are not the actual lender. In these cases, borrowers are just talking to a loan sales representative looking for a commission—not the source of the capital.

The Cost of the Markup

If a typical $100,000 loan has a 20% factor rate from the actual lender, and the broker marks up that loan an additional 10-15%, the loan cost is now 30-35%. That means the broker will make 10 or 15% of that $100,000 merchant cash advance. 

This type of loan is not ideal for construction because the MCA lenders don’t understand the nature of the construction business. If they did, they would not make MCA loans to construction companies. Worse, if they do understand the construction business and don’t care, then that means they don’t care at all about the business or even try to do what is best for them. They are simply trying to do what is best for them at the expense of the construction business.  

These brokers don’t lend based on the profit of a business but the total revenue. Construction companies must pay overhead like material suppliers, equipment vendors, and employees from that revenue.

There are less expensive and less painful options for getting ahead of your financial hump. Give us a call to map out your road to recovery — (813) 712-3073

Click here to read part 4 of 4 of our Dangers of Merchant Cash Advances series.